Befriending Facebook

Facebook wants friends. Its planned initial public offering could value the company at up to $100bn, and it wants to raise $5bn – more than the biggest listings of the dotcom bubble.

The bet on Facebook is that it will be the next Google. Like Google it has found a way to access valuable personal data, allowing targeted advertising.

Mark Zuckerberg seems to think the company he founded is more valuable. If Facebook reaches $100bn, it will be worth almost 27 times revenue, five times Google’s valuation.

Investors with their feet on the ground may prefer to look at valuation per employee. At the top end of the range being discussed, Facebook would be worth $31.25m for each worker, from secretaries up to Mr Zuckerberg. Googlers were valued at “just” $12.9m each when it floated. By comparison, Goldman Sachs bankers are valued at $1.7m each.

History suggests these measures will be ignored. The average first-day pop for US IPOs in the past 50 years was 16.8 per cent, according to Jay Ritter at the University of Florida. UK flotations produced similar-sized jumps, while the day-one return from listings in China averaged 137 per cent since 1990 – no wonder Mao was replaced by the market.

Investors who secure some of the $5bn of Facebook shares being sold should consider flipping them immediately. Ignoring the first day, the average US IPO returned 3.4 percentage points a year less than similarly sized existing companies over the first five years, Prof Ritter says.

There is some good news for those who want to “friend” Facebook: exclude IPOs with turnover below $50m and new flotations pace similarly sized existing listings.

Facebook might be the next Google. But Google created the targeted advertising market, while Facebook faces stiff competition. It might succeed – but so might LinkedIn. LinkedIn was last year’s hot IPO, and its shares more than doubled on day one. Since then they have fallen almost a fifth.